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Put your money where your mouth is: Do financial firms follow their own recommendations?

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  • Chan, Kin Wai
  • Chang, Charles
  • Wang, Albert

Abstract

In this paper, we explore how US financial firms trade relative to their own equity analyst recommendations. In the quarter-of and that immediately follow a recommendation, firm trades are significantly positively related to recommendation changes. This relation is robust to controls for sub-sample effects, return/momentum related phenomena, size effects, controls for consensus recommendation, and other data normalizations. Our results show that financial firm trades are consistent with their analysts' research and recommendations, despite recent conjecture to the contrary.

Suggested Citation

  • Chan, Kin Wai & Chang, Charles & Wang, Albert, 2009. "Put your money where your mouth is: Do financial firms follow their own recommendations?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1095-1112, August.
    • Handle: RePEc:eee:quaeco:v:49:y:2009:i:3:p:1095-1112
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    References listed on IDEAS

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    1. Li, Xi, 2005. "The persistence of relative performance in stock recommendations of sell-side financial analysts," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 129-152, December.
    2. S.G. Badrinath & Sunil Wahal, 2002. "Momentum Trading by Institutions," Journal of Finance, American Finance Association, vol. 57(6), pages 2449-2478, December.
    3. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    4. Kee H. Chung, 2000. "Marketing of Stocks by BrokerageFirms: The Role of Financial Analysts," Financial Management, Financial Management Association, vol. 29(2), Summer.
    5. Brad Barber & Reuven Lehavy & Maureen McNichols & Brett Trueman, 2001. "Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns," Journal of Finance, American Finance Association, vol. 56(2), pages 531-563, April.
    6. Ivkovic, Zoran & Jegadeesh, Narasimhan, 2004. "The timing and value of forecast and recommendation revisions," Journal of Financial Economics, Elsevier, vol. 73(3), pages 433-463, September.
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    Cited by:

    1. Andreas Charitou & Irene Karamanou, 2020. "Sleeping with the enemy: should investment banks be allowed to engage in prop trading?," Review of Accounting Studies, Springer, vol. 25(2), pages 513-557, June.
    2. Ricardo De La O & Sean Myers, 2021. "Subjective Cash Flow and Discount Rate Expectations," Journal of Finance, American Finance Association, vol. 76(3), pages 1339-1387, June.

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